Private Equity on ‘Life After Lockdown’

It is hard to believe that little more than a month has passed since the WHO declared a pandemic on March 11th. As Europe and the US continue to endure various degrees of lockdown measures to contain the Covid-19 outbreak, some of the Asian countries that were first to experience the pandemic have started to lift these measures and are gradually transitioning back to normality. Wuhan, the epicentre of the outbreak, has lifted its lockdown after 76 days. Looking at the recent updates we have received from the managers and companies that we invest with in Asia, we can start to think about what the world may look like on the other side.

A common theme that emerges is just how long it will take to fully assess the impact of the pandemic. Even though Asian countries are ahead of the US and Europe in containing the outbreak and are starting to normalise after an extended lockdown, general economic activity is far from being back to normal – one of our private equity managers reports that traffic congestion levels (an indicator of economic activity) are still 20-50% below last year in many Chinese cities. Furthermore, initial signs have emerged of a second wave of outbreaks which may lead to an extended period of rolling lockdowns. One of our managers that invests in consumer companies in China estimates an overall fall in revenues of 33% vs 2019, but this will not be reflected in valuations until much later this year as private equity funds typically report with a lag (Q1 figures are typically released in June and Q2 figures in August). As a result, we are unlikely to have a clear view of the impact of the pandemic on valuations until the second half of this year, at the very earliest.

Another one of our managers observed that, while public markets have fallen sharply this year, the valuations of public companies comparable to those in their portfolio have not moved in the six months between September 2019 and March 2020. This may show resilience but could also be a sign of downgrades yet to come as investors wait to fully assess the impact of the pandemic.

Clearly there has been a divergence in the fortunes of different sectors, with healthcare and technology companies thriving, while restaurants, tourism and other offline businesses have suffered sharp declines in revenues. One of our Asian managers estimated a year on year fall in revenues of over 80% for one of its companies that is a bricks and mortar retailer, while another one of its companies which has online and offline channels reported an increase in revenues of over 200%, driven by a 1,000% increase in online sales.

Whatever the outcome, consistency and discipline will remain key for investors – funds that deploy capital in the post-Covid-19 world will manage their dry powder and this could prove to be a very strong vintage for private equity investors.